The open banking platform will eventually change the entire banking ecosystem – from the products and services offered, to the delivery channels and third-party partnerships. These changes will affect and redefine customer experiences and expectations. Third-parties will have the ability to use customer’s shared data to identify the best financial products and services for them. Additionally, FIs can utilize open banking technology to strengthen customer relationships and customer retention by better helping customers to manage their finances instead of simply facilitating transactions. Currently, most FIs in the U.S. who have embraced and deployed some variation of open banking via application programming interface (API) have not approached the new frontier of contractually defined data sharing as a monetization opportunity, but that could change at any juncture in the evolution. While customers of the bank are not interested in funding any bank costs for delivering this new functionality and security, fintechs receiving the benefits of the richer and more secure data exchange may be likely targets for fees assessed by their bank partners in this blossoming initiative.
The impact of politics, as well as regulatory agencies and their perspective on “who owns the customers’ data” and costs associated with using the data can not be overlooked. While open banking offers benefits to both consumers and financial institutions, it also poses potential risks to financial privacy and the security of consumers’ finances, as well as liabilities and risks to financial institutions. Allowing third-parties to have access to sensitive personal data increases risks of data breaches, hacking and insider threats. These risks exist today where screen scraping has dominated the data sharing landscape, but these risks were not explicit since screen scaping exists without the benefits/complexities of a contractual obligation to provide the data.
However, despite the risks, FIs that don’t make account access possible and implement open banking platforms could be left behind. In early October, Bloomberg reported on a McKinsey study that found that a majority of FIs globally may not be economically viable because their returns on equity aren’t keeping pace with costs. Losing bank customers to more nimble Fintech firms is not a viable option for these institutions. And while a report issued earlier this year suggests that while only one percent of bank customers have used open banking, another 72 percent are interested in the benefits open banking could offer them. The dilemma is fairly complex at it’s core, and could evolve into and interesting battle between Financial Institutions and Fintechs. If the Fintech Data Aggregators who power most of the Fintech firms who provide applications loved by consumers and small businesses today don’t find agreeable contract terms to continue to access the FI data for consenting customers, the FI’s could chose to stop allowing the Data Aggregators to consume data as they do today – without any explicit contract or financial liability with the FI. Additionally, the FIs outside of the top few who have led the way to the new world of Open Banking may not find a value proposition to invest in the infrastructure necessary to provide APIs to their core systems. This next wave of Fis may deem it necessary to charge the Data Aggregators fees to provide the service. If this becomes the norm, the Data Aggregators would be forced to pass these data access costs along to the Fintech application providers who benefit from the data being received. It would seems inevitable, that these Fintech providers would then seek to recover these costs somewhere in their business model – possibly resulting in charges to end users of their application. Any fees associated with many of the Fintech applications may cause customer attrition vs. the largely free nature of most Fintech applications today. This scenario may take a couple of years to play out as FIs outside the top 5 merge and wrestle with a low rate environment, and stagnant EPS growth.
How FIs will leverage open banking in the next year
Efma and Infosys Financial surveyed bankers for its 2018 Digital Banking Report Survey to determine how FIs would pursue open banking initiatives. The majority of respondents said they would implement open banking platforms to comply with existing and emerging requirements.
Next, respondents said the goal would be to leverage customer data held by third parties to create contextual offerings. This is interesting because it shows that executives know that the right APIs can share data in both directions. In the current USA Open Banking landscape, none of the first wave of Open Banking implementations, nor any of the standards organizations, support more than one-way data sharing (Fintech’s receiving data for consenting customers). The EU standards for PSD2 are leading the way with two-way data flow.
Finally, there were three additional goals executives were interested in with regard to open banking: participating in the existing ecosystem, selling third party products and services to the bank’s customer base, and enabling partners to resell the bank’s products and or create value.
We expect to see more FIs investigate open banking in 2020 and look forward to working with many institutions as they move down this path. With the right partner, bank executives will have the confidence to meet consumer demand for open banking while mitigating the risks.